Valeant Pharmaceuticals Intl (VRX) acquires R&D results from other companies in the pharmaceutical industry and maximizes the return on those assets, acting as a private-equity-type company of sorts while also using its Canada domicile on a tax basis, says Gautam Dhingra, Founder and CEO of High Pointe Capital Management, LLC.
“[Valeant‘s CEO] realized that the productivity of R&D dollars in the pharmaceutical industry had declined consistently for quite a long period of time. So he set about designing a company that spends very little on R&D, but instead focuses on buying existing products that were developed by other pharmaceuticals. He then cuts costs and takes advantage of tax laws to minimize the tax burden, and in this process generates extraordinary income from the same assets that a traditional pharmaceutical company could not,” Dhingra said.
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VRX bypasses the entire traditional strategy of investing billions in R&D in hopes of finding a blockbuster drug, and the company is able to generate income from R&D assets in ways traditional companies cannot.
“When you compare this company to other pharmaceuticals, you see that instead of spending 15% of the revenue on R&D the way a traditional pharmaceutical does, Valeant spends hardly 3% on R&D, so that saving goes directly to the bottom line. On top of that, the company’s tax rate is 3%, compared to the normal 25% that other companies pay. And lastly, Valeant benefits from cost cuts as it generates economies of scale,” Dhingra said.
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